Power Auction: Rates in Illinois to Rise

The cost of “running” your business, not to mention heating your home, in Illinois may change after the Illinois Commerce Department’s recent power auction. [1] Currently, power rates have been frozen since 1997, but the freeze will expire in 2007. [2] It is then that some people, including state legislators, feel power rates will increase and the results of the power auction will be felt. [3] The current statute governing power rates in Illinois is known as the Electric Service Customer Choice and Rate Relief Law of 1997. [4] In the next paragraphs this article will attempt to synthesize some of the information surrounding this topic by explaining the power auction, the extent of potential rate increases, and the potential for a continuation of the Rate Relief Act of 1997.

The power auction took place from September 5 to September 8. [5] During the power auction state suppliers placed bids for the right to supply electricity to ComEd and Ameren. [6] The power auction also set fixed power rates for homes, small businesses, and large businesses. [7] Winning bidders in the auction included: “Ameren Energy Marketing, American Electric Power Service, Conectiv Energy Supply, Constellation Energy Commodities Group, DTE Energy Trading, Dynegy Power Marketing, Edison Mission Marketing & Trading, Energy America, Exelon Generation, FPL Energy Power Marketing, J. Aron, J.P. Morgan Ventures Energy, Morgan Stanley Capital Group, PPL EnergyPlus, Sempra Energy Trading and WPS Energy Services.” [8] The Illinois Commerce Department will release more details surrounding the auction on December 1. [9]

Views on the power auction depend on who you ask. Patricia Clark, spokeswoman for the Citizens Utility Board, a consumer advocacy group, feels that the Illinois legislature should delay the current freeze on rates until more competition enters the electricity market. [10] On the other hand, Mort Kamien, Northwestern University economist, blames the lack of competition on the rate freeze because rates are currently far below market value. [11]

A major concern among businesses and consumer advocacy groups is that the power auction approach will lead to increased rates for customers. [12] Excelon’s customers, based on the auction results, would see their rates rise by approximately 22 percent. [13] Customers of Ameren’s electric utilities would see their rates rise anywhere from 40 to 55 percent. [14] The Building Owners and Managers Association of Chicago estimates that office buildings in Chicago, on average, could experience a 72 percent increase in their ComEd electricity rates. [15] This figure rate increase was 90 percent for Chicago area office buildings that used electricity for heat, and 54 percent for those that did not. [16] Despite the potential increases, John Rowe of Excelon emphasized that “‘even with the 22 percent increase on ComEd’s base, prices will have risen less than inflation since the rate cut’ a decade ago.” [17] On the flip side, consumer advocate Patricia Clark, emphasizes that the rate increases come at a time when companies like Excelon are making large profits. [18]

The power auction is under attack in court and in the legislature. On August 23 the Appellate Court for the Second District of Illinois denied Illinois Attorney General Lisa Madigan’s request to halt the Illinois Commerce Department approved September power auction. [19] Madigan’s appeal of the order allowing the auction is currently pending in the Second District Appellate Court. [20] If Madigan blocks the rate increase, ComEd may need to purchase power on the spot market. [21] Purchases made on the spot market are more volatile than long term contracts, and thus, rates may increase despite a block by Madigan. [22] In fact, John Rowe of Excelon, suggested that legal action by Madigan caused uncertainty and may have been a factor in higher auction prices. [23]

In the Illinois Legislature, House Bill 5766, whose prime sponsor is Lisa Dugan, proposes a continued rate freeze for three more years. [24] “David Vite, president of the Illinois Retail Merchants Association, said the legislation would hurt business” because “businesses would have to continue paying transition charges for switching to other providers.” [25] ComEd also disapproves of the legislation, and has stated that a longer rate freeze would put the company at risk of bankruptcy. [26]

Although power rate increases in Illinois seem likely, they will depend on the outcome of Attorney General Lisa Madigan’s pending appeal and on House Bill 5766.